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This third issue in the Hedge Funds Governance Series elaborates on board meetings for hedge funds. The responsibility for implementing and maintaining proper governance for hedge funds rests with the boards of directors. In the discharge of their fiduciary responsibilities, boards of directors are expected to oversee hedge funds' activities and delegates; numerous references in the Weavering judgment1were made to the "evidence" and so it is imperative that there is a robust system whereby the deliberations and decisions of hedge funds' boards can be documented and evidenced.
Frequency and Attendance
Periodic board meetings should be convened, but the frequency of such meetings may well differ from one hedge fund to another. For each hedge fund, it is important to establish a minimum number of meetings per annum. According to research conducted by Carne in 20112, the majority of investors expected four board meetings whilst over one third were in favour of a minimum of two meetings per year. As hedge fund directors and board meeting attendees are often likely to reside in different countries, board meetings may well be held via telephone conference call. However, it is preferable that the directors meet together in person for at least one meeting each year. Accordingly, hedge fund directors need to ensure that they have sufficient time capacity to attend all board meetings, taking into account any necessary travel requirements.
Convening of the Board Meeting by the Meeting Secretary
Hedge funds should make arrangements so that a meeting secretary is engaged to convene the periodic board meetings and to circulate all relevant documentation to board meeting attendees. For Cayman Islands domiciled hedge funds, there is no legal requirement for the formal appointment of a Company Secretary, but best practice dictates that hedge funds should appoint a service provider that is experienced in the provision of corporate secretarial services to attend board meetings, take the minutes and to deal with follow up and ancillary matters.
Notice and Board Meeting Agenda
A draft notice of board meeting, stating the place, date and time of the proposed board meeting, together with a list of agenda items should be circulated by the meeting secretary to each of the directors for their review of the proposed business of the meeting and to provide them with the opportunity to make amendments and add agenda items. Once finalised, it should be sent to all of the board meeting attendees sufficiently in advance of the board meeting so that they can prepare accordingly. See Board Pack below.
Carne has developed a detailed list of agenda items that can be used as an initial starting point. As regular board meetings are held over time, it is typical that this will be modified to suit the particular requirements of different hedge funds.
In advance of each board meeting, the meeting secretary should send to the directors a board pack that contains all the relevant documents for the forthcoming meeting. The board pack will contain documents such as: the notice and agenda; previous minutes and matters arising; report of the administrator; report of the investment advisor; copies of any documents signed by one or more directors that should be ratified by the whole board; draft audited financial statements, audit findings report and auditors letter of representation (typically annually or semi-annually only); any other document relevant to other agenda items.
Appointment of Chairman
A director may be appointed as chairman of the hedge fund company, but it is more usual for a chairman of the meeting to be elected each time that a board meeting takes place. The chairman's role is to preside over the meeting and its attendees and to ensure that the business is conducted in an orderly fashion. Typically, a chairman does not have an additional vote if there is equality of votes and this is one reason why it is preferable to have an uneven number of directors.
Board meetings should be attended by all directors and the meeting secretary. Other parties should attend by invitation from the directors and as a matter of course this typically includes representatives from the investment advisor, the administrator and, at board meetings where audited financial statements are to be approved, the auditor. Board meetings are confidential, internal management meetings and it may not be necessary or desirable for every non director/secretary party to be present for the entire duration of board meetings. For example, the administrator should attend each meeting to present their administration report and to answer directors' questions – there may be no need for the administrator to be present for other parts of the meeting.
Minutes and Matters Arising
The meeting secretary should take a written record of the business conducted at board meetings and of important decisions made. These decisions will usually take the form of resolutions, which are legally binding. Throughout the course of a board meeting, there will often be discussions which result in a number of action points. The meeting secretary will note these action points as "matters arising" and it is good practice for the minutes to include an appendix that lists all the matters arising, together with annotation to indicate whether they still require action (open) or whether they have been actioned (closed).
Draft minutes from the previous board meeting and open matters arising should be presented at the next meeting so that the directors can approve the minutes for signature by the chairman.
It is a common requirement that formal resolutions of the directors are required outside of the schedule for periodic board meetings. Typically, this will be in connection with circumstances where directors are empowered with discretionary authority to approve certain matters, such as waiving or reducing notice periods or minimum subscription amounts etc. A convenient way of passing such resolutions is for the secretary to circulate to the directors a set of written resolutions for their signature. Often, the written resolutions will be accompanied by additional information to enable the directors to consider the matter prior to signing. Written resolutions have the same legally binding effect as resolutions passed at board meetings, but they are not effective until all directors have signed. Accordingly, written resolutions are sometimes referred to as unanimous written resolutions.
Articles of Association
The Articles of Association of hedge fund companies will set out the general power and duties of boards, as well as the proceedings at board meetings. Accordingly, the comments above should always be considered in the light of and performed in accordance with the Articles of Association.
1 Weavering Macro Fixed Income Fund Limited (in liquidation) vs Stefan Peterson and Hans Ekstrom
2 Corporate Governance In Hedge Funds: Investor Survey 2011 (Carne Global Financial Services)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.